This is, of course, terrific news for same-sex couples, but it is not without its challenges – particularly for couples who live in states which don’t recognize same-sex marriage. For example, the new IRS rule only applies to solemnized marriages entered into in a place where it is legal to do so; other forms of legal protection for same-sex couples, such as civil unions or domestic partnerships, will not be recognized for federal tax purposes. In addition, many states still have some type of estate or inheritance tax that doesn’t recognize the federal exemption amounts.
While some states – Massachusetts, New York, and the District of Columbia, for instance – recognize same-sex marriage and will not tax a surviving spouse, it’s not clear how other states will treat married same-sex couples for state estate tax purposes.
For married same sex couples, the new rule introduces both potential advantages and potential disadvantages. As a practical matter, same sex married couples can now transfer assets between themselves during lifetime and at death with no limits or taxes. On the other hand, some couples will start paying more in income taxes because of the “marriage penalty.” There are other ramifications as well.
Whether, and to what extent, you are affected by this change depends on your income level, your deductions, and other factors. I encourage you to speak to your CPA or tax preparer to see if you are eligible for a refund for prior years – if, for example, you were receiving health insurance benefits from your spouse’s employer, the value of that would have been taxed as income under the old policy, and you may be able to get a refund for the tax paid on that income over the last three years. If you would like a referral to a qualified accountant who is competent in this area, please let us know and we would be happy to make an introduction.
If our law firm prepared your estate plan, then you will be pleased to know that your documents already provide the flexibility to handle this new rule. If we have not prepared your estate plan, we are happy to review your old plan documents and provide recommendations. For couples deciding whether to get married in light of this new rule, and other recent changes in federal law, you should know that we will soon be releasing our book on the subject: Whether to Wed: Legal and Tax Issues for Gay and Lesbian Couples. If you would like to be notified when it is available for purchase, please sign up at our website: www.whethertowed.com.
I continue to speak on LGBT estate planning locally and nationally and our team regularly updates our specialty website: www.gayestateplanning.com.
Since a referral is the highest compliment a client can make, please keep us in mind and share our contact information with friends who might also need this important work done.